DEFEXPO 2018. Priority for PSUs hurting ‘Make in India’ in Defence

Priority in awarding tenders by Ministry of Defence (MoD) to Defence Public Sector Units (DPSUs) and Ordnance Factory Boards (OFBs), and higher multiplier for offset discharge through DRDO, are some of the major issues hampering development of a level-playing field and holding back ‘Make in India’ initiative within defence sector, says a report jointly release by KPMG and Assocham.

DPSUs are afforded several undue advantages over private manufacturers. The MoD always preferred DPSUs as opposed to awarding contracts based on competitive tenders for various reasons, said a report on ‘Creating a level playing field to facilitate Make in India in defence,’ released by Defence Minister Nirmala Sitharaman at the DefExpo 2018.

Over the years, MoD had favoured DPSUs and OFBs over private sector by granting tenders based on nominations. Even after multiple announcements with regards to ending award of contracts on nomination basis, the MoD, on many instances, has not followed competitive tendering process and has instead issued tenders to public entities.

For instance, in 2017, the MoD granted the BMP-2 infantry combat vehicle upgrade programme worth $370 million to OFB and Bharat Electronics Ltd. Announced in March 2016, this programme was to be allotted through a competitive tender process. A number of private players, including Reliance Defence, Mahindra, L&T, Tata Motors and Alpha Design, were eliminated post issuance of Request for Information without any clarification.

Similarly, in 2012, the MoD revised the offset obligation guidelines wherein it proposed an undue advantage of a higher multiplier for collaboration with DRDO. This defeated the main objective of offset policy, which is aimed at developing an indigenous Defence manufacturing ecosystem.

Cost of capital

The report said that difference in cost of capital is resulting in undue advantage for foreign players/DPSUs. The cost of capital for private manufacturers is 10-12 per cent per year while for DPSUs and OFBs, the capital requirement is funded by MoD itself. For instance, if a contract takes two to three years to fructify, the costs for a private player end up being 25-30 per cent higher than the costs for public entities. Such a sizeable difference in the cost of capital makes private firms uncompetitive and often times the private firms are discouraged from participating in Defence tenders, the report said.

India needs to strategically leverage the potential of private enterprise and public entities to ensure success of ‘Make in India’ in Defence. Other sectors such as automotive and healthcare, where ‘Made in India’ has been successful been primarily driven by private investments

Even in the Defence industry, the private players have capacity to deliver many of the required Defence systems/equipment. This will help in bringing down the rising quantum of imports and create significant economic benefits for the country. This approach has been highly successful in space and atomic energy programmes and a similar approach is needed to treat private players as partners rather than mere equipment/service providers, said the report.

Modernisation needs

To meet growing modernisation needs of Indian Armed Forces, the Ministry of Defence will need to acquire equipment worth over $250 billion by 2027. However, recent estimate shows that the current delivery capacity of the Defence sector is $75-80 billion annually.

At this rate, the Defence industry will be able to manufacture equipment worth $80 billion, and the rest will have to be imported. This means the ratio of indigenous to imported equipment is stagnating at 30:70.

To achieve the aspirational target of manufacturing 70 per cent of Defence equipment indigenously, India needs to incentivise private enterprise for development of large scale R&D and manufacturing capabilities, the report said.

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